At an emergency congress, party members voted overwhelmingly to drop Hung Hsiu-chu following a series of poor ratings in opinion polls.
Hung Hsiu-chu will be replaced by the KMT’s chairman, Eric Chu.
Before the decision, the two favorites for the presidential poll were, for the first time, both women.
Hung Hsiu-chu, the deputy parliament speaker, was the KMT’s first female candidate. The opposition Democratic Progressive Party (DPP) candidate is Tsai Ing-wen, who lost in the presidential race in 2012.
Taiwan has never had a female president.
Hung Hsiu-chu’s approval ratings were lagging far behind those of Tsai Ing-wen – partly because she had lost support by advocating stronger ties with China at a time when some Taiwanese voters are wary about the island becoming too close to Beijing.
Eric Chu, the mayor of suburban New Taipei City who is considered a moderate on China, has more experience in governing, leading many party members to hope he will stand a better chance against Tsai Ing-wen, despite his late entry in the race.
The KMT suffered a crushing defeat in local elections in 2014.
Taiwan’s outgoing President Ma Ying-jeou resigned as party chairman after the poll, which was widely seen as a rejection of his push for close ties with Beijing.
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